Crypto slippage is a common phenomenon users experience when trading crypto due to the intrinsic volatile nature of crypto tokens. The concept highlights discrepancies between expected token prices and actual market prices due to asset price fluctuations.
Notably, variables like market dynamics, liquidity and crypto exchange policies determine crypto slippage. While it can be positive, enabling a user to earn extra profits, it is mostly negative, bringing additional costs.
Noteworthy is that some crypto markets witness more slippage than others, especially with bulk trade orders. Understanding all these will aid investors in minimizing risks while trading and making the most profit from a volatile situation.
So we’ll explore more about crypto slippage mechanisms and the best practices to lessen the effects of volatility in crypto trading. Let’s dive in!
Crypto Slippage and Causes
In a nutshell, a crypto trade executing at a value different from the expected price underlines crypto slippage. For instance, buying a token: $X at $5 on an exchange with a sum of $100.
One would expect 20 $X tokens in one’s wallet after opting for the trade. However, coming back and finding, say 18 $X tokens, because the token’s price increased to $5.5 during the narrow execution window. That’s textbook crypto slippage.
And why is this so? First, the crypto market is highly volatile. Within the period between entering a trade and executing it, the token’s price can elevate or drop, hence slippage. Also, liquidity comes into play here. If a token is not readily available and easy to sell, it prolongs this particular period. Accordingly, this leaves more room for slippage.
Furthermore, users set their slippage tolerance on an exchange while placing a trade order. While a low tolerance could easily stop the order from execution, a high tolerance would increase the chances of slippage.
Moreover, other variables determine crypto slippage on the user’s trading platform, either a DEX or a CEX. These include trading volumes, transaction fees on CEXs, limit orders, etc.
Crypto Slippage Best Practices
Since it is unavoidable, you can adopt these practices to get the best from your crypto trades:
#1. Optimize Slippage Tolerance
Setting the slippage tolerance outlines the level of volatility a user will tolerate while executing a trade. So it’s important to set the right slippage tolerance.
You can set the tolerance to a minimum for more stable markets to carry out the trade at the expected price. However, trading low-liquidity assets or in a very volatile market requires higher tolerance to go through with trades.
#2. Break Large Trades into Chunks
For markets with low liquidity, the total assets involved in a large trade may not be readily available. Accordingly, trading in bulk at once may leave a large window for significant slippage.
Hence, dividing such trades into smaller bits results in faster execution with minimal room for slippage, particularly for low-liquidity markets.
#3. Don’t Trade When the Network is Congested
When the network is congested, trades take longer to execute causing increased slippage chances. Meanwhile, it also entails higher gas fees which costs investors more funds. So trade when the network is less congested or avoid networks like Ethereum featuring high congestion rates.
#4. Bot Trading
Automatic trades on trade bots execute faster than manual trades. Notably, bots hold the user’s funds until market conditions are optimal for the trade. Executing the trade at such a window minimizes the chances of slippage for the user.
#5. Don’t Trade When the Market is Highly Volatile
When the market is in flux due to fluctuating projects, influencers’ posts on social media, etc, avoid trading then. Users should avoid trading when the market fluctuates rapidly as the chances of slippage are significant.